T ECHNICAL A RTICLE

Project Risk Management:

A Combined Analytic Hierarchy
Process and Decision Tree Approach
Dr. Prasanta Kumar Dey
ABSTRACT: Time, cost and quality achievements on large-scale construction projects
are uncertain because of technological constraints, involvement of many stakeholders,
long durations, large capital requirements and improper scope definitions. Projects
that are exposed to such an uncertain environment can effectively be managed with
the application of risk management throughout the project life cycle. Risk is by nature
subjective. However, managing risk subjectively poses the danger of non-achievement
of project goals. Moreover, risk analysis of the overall project also poses the danger of
developing inappropriate responses. This article demonstrates a quantitative approach
to construction risk management through an analytic hierarchy process (AHP) and
decision tree analysis. The entire project is classified to form a few work packages. With
the involvement of project stakeholders, risky work packages are identified. As all the
risk factors are identified, their effects are quantified by determining probability (using
AHP) and severity (guess estimate). Various alternative responses are generated, listing
the cost implications of mitigating the quantified risks. The expected monetary values
are derived for each alternative in a decision tree framework and subsequent probability analysis helps to make the right decision in managing risks. In this article, the entire
methodology is explained by using a case application of a cross-country petroleum
pipeline project in India. The case study demonstrates the project management effectiveness of using AHP and DTA.

ronment impacts, government laws and

regulations, changes in the economic and
political environment, cost and time overruns and the unsatisfactory quality of a
project are the general sources of management disappointment with a pipeline
organization.
A conventional approach to project
management (as shown in figure 1) and as
practiced by the organization studied in
this article is not sufficient. It does not
enable the project management team to
accomplish the following.

establish an adequate relationship

among all phases of the project;
forecast project achievement for building confidence of project team;
make decisions objectively with the
help of an available database;
provide adequate information for
effective project management; and
establish close cooperation among the
project team members.

The objective of this article is to model

a decision support system (DSS) through
risk analysis for making objective decisions
on project planning, design, engineering,
KEY WORDS: Risk management, work break down structure, analytic hierarchy process,
and resource deployment for completing a
decision tree analysis, cross-country petroleum pipeline, and time-cost control
project on time, within budget, and in line
with project objectives, organizational polihe success parameters for any the economic and political environ- cy and the present business scenario.
ment; and
project are in time completion,
within a specific budget and with statutory regulations.
requisite performance (technical
Proposed Project Model
Although risk and uncertainty affect all
requirement). The main barriers in achievFigure 2 illustrates the proposed
ing these are changes that occur in the projects, size can be a major cause of risk. project model. Project planning, design,
project environment. The problem multi- Other risk factors include the complexity of and detailed engineering should be taken
plies with the size of the project as uncer- the project, the speed of its construction, its up in sequence as soon as a project gets
tainties in project outcome increases with location, and its degree of unfamiliarity.
approval. Materials procurement and
A cross-country petroleum pipeline works contract preparation start concursize. Large-scale construction projects are
exposed to uncertain environments construction project is characterized by the rently with completion of design activities.
complexity of its execution with respect to The availability of funds, materials, drawbecause of the following factors.
lack of experience in relation to certain ings, specifications, contract document,
design conditions being exceeded.
planning and design complexity;
and other utilities are initiated and impleThese conditions can include water mented at the work site by contractors.
presence of various interest groups
(project owner, owners project group, depth, ground condition, pipeline size etc. Projects are controlled through effective
Other conditions include the influ- monitoring of various performance paramconsultants, contractors, vendors etc.);
resources (materials, equipment, ence of external factors that are beyond eters that are fixed during the planning
human control. External causes can limit phase. Just after project planning, risk manfunds, etc.);
resource availability, including the areas of agement with respect to time achievement
availability;
techniques and technology. Various envi- and covering all project phases is carried
climactic environment;

Cost Engineering Vol. 44/No. 3 MARCH 2002

13

out. Risk management with respect to

cost achievement should be carried
out before implementing work.
The scope of this article is limited
to establishing risk management after
the project was approved.

Risk and Risk Management Process

C.B. Chapman and D.F. Cooper,
[3] define risk as, exposure to the possibility of economic or financial loss or
gains, physical damage, or injury, or
delay as a consequence of the uncertainty associated with pursuing a
course of action. The task of risk
management can be approached systematically by breaking it down into
the following three stages.

risk identification;
risk analysis; and
risk responses
Rao Tummala and Y.H. Leung,
[17] developed a methodology for risk
management that looks at risk identification, measurement, assessment,
evaluation, risk control and monitoring. Their methodology was developed for managing the cost risk of an
EHV transmission line project.
T.M. Williams [19] examined various project risk management
research. He describes various risk
identification and analysis tools being
used by researchers and practitioners
and the management structures and
procedures needed to manage risk.

Figure 1Conventional Project Management Model

Figure 2Proposed Project Management Model

14

Cost Engineering Vol. 44/No. 3 MARCH 2002

J.R. Turner [18] suggests using

expert judgment, plan decomposition,
assumption analysis, decision drives
and brainstorming for effective identification of risk factors for a project.
J.G. Perry and R.W. Hayes [15] present a checklist of risk that may occur
throughout the life span of any project. The Delphi technique has been
used by P.K. Dey [7] for identification
of risk factors. Outside the field of
engineering and construction, an
approach for risk identification in
product innovation has been reported
by Jim Halman and J.A. Keizer [12].
Most of the analyses done so far
are centered on analyzing the duration of the project. Management is
interested in two aspects; the total

Project Plan

et
c.
pa
ck
ag
e

pa
ck
ag
e

W
or
k

W
or
k

W
or
k

D
wo o a
n rk ny
as eed pa of t
se a ck h
ssm ri ag e
en sk es
t?

pa
ck
ag
e

Work Breakdown Structure

Yes

Risk Assessment
Identify Risks
Assess Risks
Determine Consequence
scenarios
Determine Control Measure

No

Implement

e
th l
Is idua
s
re risk ble?
ra
le
to

No

Review the
work package
plan

Yes
Figure 3Risk Management Flow Chart
duration and which activities are critical in
determining that duration. Many authors
have presented the distribution of time
duration of activities as classical Beta distribution [10]. J. Berny, [1] proposed his own
distributions for practical simulations. P.K.
Dey used Monte Carlo simulation for ana-

lyzing project risk of petroleum pipelines

[8].
Recently, a number of systematic models have been proposed for use in the riskevaluation phase of the risk-management
process. R. Kangari and L.S. Riggs [13]
classified these methods into two cate-

Table 1Scale of Relative Importance for Pair-Wise Comparison

Intensity

Definition

Explanation

Equal importance

3
5
7

Moderate importance
Essential or strong importance
Demonstrated importance

Extreme importance

2, 4, 6, 8

Intermediate values

Two activities contribute equally

to the object
Slightly favors one over another
Strongly favors one over another
Dominance of the demonstrated
importance in practice
Evidence favoring one over
another of highest possible order
of affirmation
When compromise is needed

Source: T.L. Saaty, The Analytic Hierarchy Process [16].

Cost Engineering Vol. 44/No. 3 MARCH 2002

gories: classical models (i.e. probability

analysis and Monte Carlo simulation), and
conceptual models (i.e. fuzzy-set analysis).
They noted that probability models suffer
from two major limitations. Some models
require detailed quantitative information,
which is not normally available at the time
of planning, and the applicability of such
models to real project risk analysis is limited, because agencies participating in the
project have a problem with making precise decisions. The problems are ill
defined and vague, requiring subjective
evaluations that classical models cannot
handle.
There is a need for a subjective
approach to project risk assessment, with
objectivity in the methodology. The analytic hierarchy process (AHP) developed by
T.L. Saaty [16] provides a flexible and easily understood way of analyzing project
risks. It is a multi criteria decision-making
methodology that allows subjective as well
as objective factors to be considered in
15

Table 2Comparison Matrixes in Factor Level

Factors

Technical
Risk

Financial
& Economic
Risk
3
1
1/2
1/4
1/3

Technical Risk
1
Financial and Economic Risk 1/3
Organizational risk
1/4
Acts of God Risk
1/5
Clearance Risk
1/5
Consistency Ratio: 0.042. acceptable
project risk analysis. The AHP allows the
active participation of decision-makers in
reaching agreement and it gives managers
a rational basis on which to make decisions.
Formulating the decision problem in
the form of a hierarchical structure is the
first step. In a typical hierarchy, the top
level reflects the overall objective or focus
of the decision problem. The elements
affecting the decision are represented in
intermediate levels. The lowest level comprises the decision options. Once the hier-

Organizational
Risk

Acts of
God Risk

Clearance
Risk

Likelihood

4
2
1
1/2
1/3

5
4
2
1
1/2

5
3
3
2
1

0.479
0.228
0.146
0.064
0.083

archy has been constructed, the decisionmaker begins the prioritization procedure
to determine the relative importance of the
elements in each level of the hierarchy.
The elements in each level are compared
pair wise with respect to their importance
in making the decision that is under consideration. The verbal scale used in an
AHP enables the decision-maker to incorporate subjectivity, experience, and knowledge in an intuitive and natural way. After
the comparison matrices have been creat-

Table 3Likelihood of Risk in a Project

Factors

Likelihood

Sub-factors

Technical Risk

0.479

Scope change
Technology selection
Implementation methodology
Equipment risk
Materials risk
Engineering and design change

Likelihood
LP
GP
0.36
0.172
0.124
0.059
0.13
0.062
0.073
0.035
0.08
0.038
0.233
0.112

Financial
& Economical
Risk

0.228

Inflation risk
Fund risk
Changes in local law
Changes in Govt. policy
Improper estimate

0.152
0.383
0.105
0.105
0.255

0.035
0.087
0.024
0.024
0.058

Organizational
Risk

0.146

Capability of owners project

group
Contractors capability
Vendors Capability
Consultants Capability

0.106

0.015

0.283
0.448
0.163

0.041
0.065
0.024

Calamity Normal
Calamity abnormal
Environmental clearance
Land acquisition
Explosive clearance
Other clearances

0.44
0.56
0.026
0.461
0.133
0.142

0.028
0.036
0.022
0.038
0.011
0.012

Acts of God

0.064

Clearance risk

0.083

LPLocal percentage
GPGlobal percentage
16

Cost Engineering Vol. 44/No. 3 MARCH 2002

ed, the process moves on to the phase in

which relative weights are derived for the
various elements. The relative weights of
the elements of each level with respect to
an element in the adjacent upper level are
computed as the components of the normalized eigenvector associated with the
largest eigenvalue of their comparison
matrix. The composite weights of the decision alternatives are then determined by
aggregating the weights through the hierarchy. This is accomplished by following a
path from the top of the hierarchy to each
alternative at the lowest level, and multiplying the weights along each segment of
the path. The outcome of this aggregation
is a normalized vector of the overall
weights of the options. The mathematical
basis for determining the weights has been
established by T.L. Saaty [16].
Conventionally, risk analysis is performed at the overall project level. The risk
analysis should show the effects of the risk
factors on the project performance in terms
of time, cost, and quality goals. Although
risk analysis at the project level may be sufficient for a small project from the investment-decision and feasibility-study point of
view, the technique has its limitations for
large projects.
D.F. Cooper [4] suggested that, in the
risk-engineering approach, systematic risk
evaluation could be performed by subdividing a project into its major elements,
and analyzing the risk and uncertainty associated with each in detail. Moreover, the
severity of risk pertaining to a project varies
from activity to activity. Some activities are
more responsive to a specific risk than others. To risk analyze a project, the level of
activity for which risks are to be analyzed
has to first be determined.
M.A. Mustafa and J.F. Al-Bahar [14]
applied the AHP in risk analysis for the
assessment of risk in a construction project

Table 3Likelihood of Risk in a Project (continued)

Sub-factors

River X-ing

Pipeline
Laying

Station
Construction

Other Work
Packages

Scope change
technology selection
implementation methodology
equipment risk
materials
eng.. and design change

LP
0.17
0.29
0.47
0.33
0.17
0.37

GP
0.029
0.017
0.029
0.012
0.007
0.041

LP
0.39
0.23
0.26
0.21
0.35
0.33

GP
0.067
0.014
0.016
0.007
0.013
0.037

LP
0.31
0.11
0.17
0.28
0.26
0.13

GP
0.053
0.007
0.011
0.010
0.010
0.015

LP
0.13
0.37
0.1
0.18
0.22
0.17

GP
0.022
0.022
0.006
0.006
0.008
0.019

Inflation
Fund
local law
policy
estimate

0.25
0.25
0.18
0.25
0.43

0.009
0.022
0.004
0.006
0.025

0.25
0.25
0.18
0.25
0.43

0.009
0.022
0.004
0.006
0.025

0.25
0.25
0.19
0.25
0.17

0.009
0.022
0.005
0.006
0.010

0.25
0.25
0.25
0.25
0.08

0.009
0.022
0.006
0.006
0.005

Capability of owners project

group Contractors capability
Vendors Capability
Consultant Capability

0.33
0.37
0.21
0.49

0.005
0.015
0.014
0.012

0.3
0.33
0.29
0.13

0.005
0.014
0.019
0.003

0.27
0.22
0.4
0.15

0.004
0.009
0.026
0.004

0.1
0.08
0.1
0.23

0.002
0.003
0.007
0.005

Calamity Normal
Calamity abnormal

0.41
0.32

0.012
0.011

0.35
0.47

0.010
0.017

0.14
0.09

0.004
0.003

0.1
0.12

0.003
0.004

Environmental
Land acquisition
Explosive clearance
Other clearance

0.25
0.13
0.25
0.25

0.005
0.005
0.003
0.003

0.25
0.51
0.28
0.25

0.005
0.020
0.003
0.003

0.25
0.3
0.36
0.15

0.005
0.011
0.004
0.002

0.25
0.06
0.11
0.35

0.005
0.002
0.001
0.004

Overall Likelihood of failure

0.286

0.317

0.229

0.169

Rank

LPLocal percentage, GPGlobal percentage

from the evaluation perspective. P.K. Dey,

[5] applied AHP for cost risk analysis of a
construction project
This article adopts AHP for analyzing
risk in the project and uses decision tree
analysis (DTA) for selecting specific risk
responses for specific work packages from
various alternatives.
Decision trees use calculations of
expected monetary value (EMV) to measure the attractiveness of alternatives. They
also use graphical models to display several
relevant aspects of a decision situation.
These graphical models consist of treelike
structures (hence the name) with branches
to represent the possible action-event combinations. The conditional payoff is written
at the end of each branch. A tree gives
much the same information as a matrix,
but, in addition, it can be used to depict

multiple-stage decisions. These are a series

of decisions over time[9].
A decision tree approach does the fol-
lowing.
It logically structures risk management
philosophy by identifying alternative
responses in mitigating risk.
It provides a basis for quantitative risk
management.
It incorporates management percep-
tions.

Methodology
The methodology adopted for risk
management in this article is explained in

the following steps.

Cost Engineering Vol. 44/No. 3 MARCH 2002

Identifying the work packages for risk

analysis.
Identifying the factors that affect the
time, cost, and quality achievement of
a specific work package.
Analyzing the effect by deriving the
likelihood of the occurrences in an
AHP framework.
Determining severity of failure by
guess estimation.
Driving various alternative responses
for mitigating the effect of risk factors.
Estimating cost for each alternative.
Determining the probability and severity of failure of a specific work package
after a specific response.
Forming a decision tree.
Deriving expected monetary value
EMV or the cost of risk response in
this case.
17

Table 4Risk Mapping in Project Level

Calamity normal

Change in policy
Capability of
owners project
group
Consultants
capability

Implementation
methodology
Fund risk
Improper estimate
Materials risk

High
S
e
v
e
r
i
t
y

Medium

Low

Land acquisition
Technology selection
Engineering and Design change
Contractors capability
Vendors capability
Calamity abnormal

Scope change

Inflation risk
Environmental
clearance
CCE clearance
Other clearances
Low

Medium

High

Probability
Selecting the best option through sta- India. The pipeline has a length of 1300
km. Its diameter is 22 inches for a length of
tistical analysis.
1112 km, 18-inches for a length of 218 km,
and 10.75 inches for a length of 123-km (a
branch line). The pipeline is designed for 5
million metric tons per annum (MMTPA)
Application
The above steps will be explained throughput. The project also consists of the
through the case of a cross-country petrole- construction of three pump stations, one
um pipeline project in the western part of pumping-cum-delivery station, two scraper

Table 5Probability and Severity of Risk Factors

Risk Factors

Scope change
Engineering and design change
Technology selection
Land acquisition
Contractors capability
Vendors Capability
Calamity abnormal
Implementation methodology
Fund availability
Improper estimate
Materials risk
18

Probability

0.172
0.112
0.059
0.038
0.041
0.065
0.036
0.062
0.087
0.058
0.038

Severity
Time
over-run
(in months)
US $)
8
5
6
4
6
8
12
3
2
2
3

Cost
Over-run
(in Millions)
90
30
20
0
30
30
90
0
0
0
0

Cost Engineering Vol. 44/No. 3 MARCH 2002

stations, four delivery stations, and two terminal stations. The project cost was estimated as 600 million in US dollars. A
detailed description of the project is available in Deys Planning for Project Control
Through Risk Analysis, A Case of a
Petroleum Pipeline Laying Project [5].
Figure 3 shows a flow chart for risk
management. A risk management group
was formed to do a risk analysis study for
the project in this article. The group consisted of one member each from mechanical, electrical, civil, tele-communication,
instrumentation, finance, and materials of
project function. They were entrusted with
collecting data, analyzing, interpreting and
preparing recommendations with active
interactions with the project groups.

Identification of Work Packages

The total project scope was decomposed and classified to form a work break
down structure (see figure 4). The first level
is project, the second and third levels are
work packages, and the forth level is activities of each work package. Based on the
importance of achieving time targets, the
following work packages were considered
for risk management.

river crossing;

Table 6The Cost Data (Million US $) for Each Package Against Various Responses
Responses

Pipeline
laying

Carrying out detailed survey with the objective

of minimum scope and design change
Selecting technology and implementation
methodology on the basis of owners /
consultants expertise, availability of
contractors and vendors and lifecycle costing
Executing design and detailed engineering on
the basis of selected technology and
implementation methodology and detailed
survey
Selecting superior contractors, consultants and
vendors on the basis past performance
Scheduling project by accommodating
seasonal calamities
Planning contingencies and acquiring
insurance
Ensuring the availability of all statutory
clearance before design and detailed
engineering
Total
Grand total

pipeline laying;
stations construction; and
telecommunication and SCADA
system

Identification of Risk Factors

The risk factors and sub-factors were
identified with the involvement of executives working through brainstorming sessions. These executives had more than 15
years of project work experience. In the
brainstorming session, they were given a
checklist of risk that was initially used to
identify risk factors and sub-factors. The
executives next used group consensus to
develop a risk structure.
The following are the risk factors and
sub-factors of the project used in this article.
Technical Risk

scope change;
technology selection;
implementation methodology
selection;
equipment risk;

12

Building
& colony
construction
3

1.5

1.5

22

16

10

River
crossing

Station
TelecommunConstruction ication & CP

11

56

32

32
140

10

10

materials risk; and

engineering and design change

Statutory Clearance Risk

Acts of God

normal natural calamities; and

abnormal natural calamities

Financial, Economical and Political Risk

inflation risk;
fund risk;
changes of local law;
changes in government policy; and
improper estimation

Organizational Risk

environmental clearance;
land acquisition;
clearance from chief controller of
explosives (CCE); and
other clearance from government
authorities

Formation of Risk Structure

This article focuses on two dimensions
of risk; its probability and severity. The risk
perception, as shown by J.R. Turner [18],
has not been considered because of the
nature of construction risk. Figure 5 shows
the AHP model for risk analysis. Level 1 is
the goal of determining the riskiness of the
project. Levels 2 and 3 are for factors and
sub-factors respectively. Level 4 contains
the alternatives or work packages.

capability risk of owners project group; Pair Wise Comparison

The AHP model was made in an
contractors failure;
Expert Choice software package developed
vendors failure; and
by E.H. Forman and T.L. Saaty [11]. Pair
consultants failure
wise comparisons were made through executives working on projects in a group deciCost Engineering Vol. 44/No. 3 MARCH 2002

19

sion-making process, using the information

from Table 1. A questionnaire was made
and distributed individually to the executives so they would not be influenced by
each other. A risk management group analyzed the responses. Table 2 shows a comparison matrix of the factor level. The outcome of matrix operation shows the likelihood of these risks occurring while the
project is being executed.
The pair wise comparison in other levels also shows the likelihood of occurrence

of risk sub factors. Synthesizing all of the

risk factors and sub-factors across hierarchy
forms shows the overall likelihood of failure of the work packages. Table 3 shows the
detailed analysis of the AHP model.

Results and Findings From Risk Analysis

Study
Technical risk is the major factor for
time and cost overrun of a project. Within
the technical risk categoryscope change,

engineering and design change, technology, and implementation methodology

selection are the major causes of project
failure. The pipeline laying and station
construction work packages are vulnerable
from scope changes. Technology selection
is vital for the river crossing and telecommunication packages. Engineering and
design changes are quite likely for the river
crossing and the pipeline laying work packages. A prior selection of implementation
methodology is crucial for the river cross-

Table 7The EMV for Pipeline Laying Project

Decision Alternatives

Cost
Probability
(million of failure **
US$)

Effect
Time
(months)

Expected Value
Time
Cost
(months) (million
US$)
3.8
6.97
0.32
0.64
1.9
3.5
0.64
1.3
0.1
0.1

Cost
(million
US$)
22
4
22
4
2

Do nothing
0
0.317
12
Carrying out detailed survey
12
0.158
2
Using superior technology
3
0.158
12
Engaging expert project team
22
0.317
2
Taking all responses as
56
0.05
2
indicated in table
*EMV = 0 + 3.8 X 7.5 + 6.97 = 35.5
(Return on investment is 7.5 million US $ per month i.e. 15% of 600 million US $ per annum)

** Basis for probability figures

Decision Alternatives
Do nothing
Carrying out detailed survey
Using superior technology
Engaging expert project team
Taking all responses as indicated in table

Basis for Probability figures

From Table 3
50 percent of do nothing
50 percent of do nothing
Same as do nothing
Assumption: probability of failure is five percent

Table 8The EMV for Pipeline Laying Across River

Decision Alternatives Cost

Do nothing
Carrying out detailed
survey and using
superior technology
Engaging expert
project team
Taking all responses
as indicated in table
20

Probability
of failure

Effect
Time
(months)

0
12

0.286
0.143

15
15

16

0.286

20

2.3

5.72

39

32

0.05

0.1

0.4

33.15

Cost
(million
US$)
40
40

Expected Value
Time
Cost
(months) (million
US$)
4.3
11.44
2.15
5.72

Cost Engineering Vol. 44/No. 3 MARCH 2002

EMV*
(million US$)

43.7
33.85

EMV*
(million US$)

35.5
15
21
28
56.9

Table 9The EMV for Station Construction

Decision Alternatives Cost

Do nothing
Carrying out detailed
survey and using
superior technology
Engaging expert
project team
Taking all responses
as indicated in table

Probability
of failure

Effect
Time
(months)

0
9

0.229
0.115

12
0.6

10

0.229

0.4

0.46

0.92

14.5

32

0.05

0.1

0.2

33

Cost
(million
US$)
24
12

Expected Value
Time
Cost
(months) (million
US$)
2.75
5.5
0.7
1.32

EMV*
(million US$)

26.2
15.06

Table 10The EMV for Telecommunication and SCADA System

Decision Alternatives Cost

Do nothing
Carrying out detailed
survey and using
superior technology
Engaging expert
project team
Taking all responses
as indicated in table

Probability
of failure

Effect
Time
(months)

0
4.5

0.169
0.085

2
2

Cost
(million
US$)
2
2

0.169

0.5

0.085

0.17

3.8

0.05

0.5

0.025

0.05

10.25

10

Expected Value
Time
Cost
(months) (million
US$)
0.34
0.34
0.17
0.17

EMV*
(million US$)

3
5

improper estimates because there are more

uncertainties in the design and implementation methodology selection. Although
the organizational risk is less vulnerable for
the project under study, consultant and
contractors capabilities are of concern to
the management of the project. The river
crossing work package is the most susceptiTable 11The Decisions Emerge From the Decision Tree Approach of Risk ble to problems from the performance of
Management for Each Work Package
consultants and contractors. The capability of the owners project group is required
for achievement of all the work packages.
Work package
Risk response
Although the project under study is
not
that vulnerable from statutory clearpipeline laying
Carrying out detailed survey
ance risk, care should be taken in getting
pipeline laying across river
Taking all responses as indicated in table environmental clearance and explosive
clearance on time for a trouble free implestation construction
Engaging expert project team
mentation.
Normal and abnormal calamities are
telecommunication and SCADA system Do nothing
the part and parcel of any pipeline project.
Total cost for risk responses is 65.65 million US$ which is much lower than 140 mil- Many times project executives rate these as
unimportant and not likely to occur.
lion US$.

ing packages, as improper selection could

cause major time and cost overruns. The
unavailability of pipe materials and delayed
delivery of pumping unit sometimes results
in a considerable time overrun.
Other major risk categories for project
achievement are financial, economic, and

political risk (F&ER) and organizational

risk. Among F&ER, fund flow problems
and improper estimates are the major causes of concerns. All the packages are equally vulnerable from fund flow problems.
However, the river crossing and pipeline
laying packages are prone to problems from

Cost Engineering Vol. 44/No. 3 MARCH 2002

21

Figure 4Work Breakdown Structure of Cross-country Petroleum Pipeline project

However, these factors are vulnerable for
all work packages and appropriate contingency plans are strongly recommended for
each package.
The pipeline laying work package is
the most risky package with a probability of
failure of 0.317. The major factors for possible failure are changes in scope, changes
in engineering and design, fund availability, vendors capability, abnormal natural

calamity and land acquisition. The river

crossing work package with a probability of
failure of 0.286 comes next. The main contributing factors are scope changes, implementation methodology selection, engineering and design change, and improper
estimates. The station construction work
package is vulnerable from scope changes
and has a 23 percent probability of failure.

Figure 5AHP model for determining riskiness of project

22

Cost Engineering Vol. 44/No. 3 MARCH 2002

Risk Mapping
All the factors were organized as per
their probability and severity (effect on
time and cost) characteristics as indicated
in table 4. The factor scope change has
been identified as the most vulnerable for
the project under study as it has a high
probability of occurrence, as well as high
severity. If there is a change in scope of any
of the work packages, there will be consid-

Failure

Do nothing

Detailed survey
-12

Time
(Months)

Cost
(Million US $)

12

22

12

22

P = 0.317
No failure
P = 0.683
Failure
P = 0.158
No failure
P = 0.842
Failure

Superior technology
-3
Expert project team
-22

P = 0.158
No failure
P = 0.842
Failure
P = 0.317
No failure
P = 0.683
No failure

All response

P = 0.05
No failure

-56

P = 0.95

Figure 6Decision Tree for Pipeline Laying Work Package

erable implications on design, planning,
and implementation of the program. These
will cause considerable time and cost overruns in the project. Factors like land acquisition, technology selection, engineering
and design changes, contractors capability,
vendors capability, and abnormal calamity

Detailed survey
and superior
technology
-12
Expert project team
-16
All response
-32

Overall Impact on Project

The factors that are in the zones having medium to high probability and severity were considered for further study. The
severity of the risk factors was calculated
with independent consideration to their
effect on each work package and on each
phase (planning, design, materials, contract preparation and implementation).
Project executives were actively involved in
these calculations. Table 5 shows the probability and severity of all risk factors.
The above results were used to derive
the expected time and cost overrun along
with the respective standard deviations
using the following formula [2].

are rated as having medium probability, as Let X be a random variable. The rth
adequate planning for the project under moment of X about zero is defined by
study prompts the executives to perceive

these factors as less vulnerable. However,

r
r
r = ( ) = p(x)
the project will end up experiencing a
x
major time and cost overrun, if any of the
above factors occur during the project if X is discrete,
(equation 1)
or
+

Failure

Do nothing

implementation. Implementation methodology, fund risk, improper estimate, and

materials risk are rated as having medium
probability of occurrence, as well as severity. The other factors are perceived as either
low probability or low severity. The factors
which have low probability and high severity should be handled carefully with the
development of contingency plans.

P = 0.286
No failure
P = 0.714
Failure
P = 0.143
No failure

Time
(Months)

Cost
(Million US $)

15

40

15

40

20

P = 0.857
Failure
P = 0.246
No failure
P = 0.714
Failure
P = 0.05
No failure
P = 0.95

Figure 7Decision Tree for River Crossing Work Package

Cost Engineering Vol. 44/No. 3 MARCH 2002

r = ( r) =
r f(x)dx

if X is continuous

(equation 2)

The first moment about zero is the

mean or expected value of the random variable and is denoted by ; thus 1 = =
E(X).
Again, the rth central moment of X or
the rth moment about the mean of X is
defined by

r = ( )r= (x- )r p(x)

if X is discrete,
or

(equation 3)

r = ( )r =
(x- )r f(x)dx
if X is continuous

(equation 4)
23

Failure

Do nothing
Detailed survey
and superior
technology
-9
Expert project team
-12
All response

-32

P = 0.229
No failure
P = 0.771
Failure
P = 0.115
No failure

Time
(Months)

Cost
(Million US $)

12

24

12

P = 0.885
Failure
P = 0.229
No failure
P = 0.771
Failure
P = 0.05
No failure
P = 0.95

The expected cost overrun = 26.44

million in US dollars,
The standard deviation = 34.72 million in US dollars.
The approved cost was 600 million in
US dollars.
No management can be satisfied with
a 50 percent chance of achievement. A
more realistic time target was derived with
the application of a statistical model as
shown by K.T. Yeo [20]. Accordingly, an
increase in duration of the project with
respect to initial planning was determined
with the application of following mathematical relationships:

[t - ] / =
(equation 5)
Xt = increase in duration of time of
project/ work package
= Expected increase in project duration, 4.88 months
= Standard deviation of duration distribution, 2.616
Z = Corresponding value from normal
distribution chart against probability
value (90 percent confidence level in
this case), 1.29.

Figure 8Decision Tree for Station Construction Work Package

The second central moment,

2 = E(X - )2

Therefore, using the data from Table 4

and equation 1 and 3, the following statistical parameters were derived:

The expected increase in project duration = 4.88 months,

is known as the variance of the random
The standard deviation = 2.686
variable.
months.
Therefore, the project will be completThe approved schedule of the project
ed with a 90 percent likelihood of an 8.3
was 36 months.
months time over-run. Similarly, the project will experience a 90 percent likelihood
Time
Cost
of a cost overrun of 71.23 million in US
(Million US $)
(Months)
Failure
dollars.
Do nothing
2
2
P = 0.169
No failure

Detailed survey
and superior
technology
-4.5
Expert project team
-3
All response
-10

P = 0.813
Failure
P = 0.085
No failure

P = 0.915
Failure
P = 0.169
No failure
P = 0.813
Failure

to avoid;
to reduce;
to transfer; and
to absorb.

0.5

The risk management group derived

the following responses for the project
under study:

Figure 9Decision Tree for Telecommunication and Cathodic Protection Work

Package
24

0.5

P = 0.05
No failure
P = 0.95

Risk Responses
Risk analysis results lead one to derive
a few effective risk responses in line with
the following principles:

Cost Engineering Vol. 44/No. 3 MARCH 2002

Carry out a detailed survey with the

objective of minimum scope and
design change.
Select technology and implementation methodology on the basis of

owners/consultants expertise, availability of contractors and vendors and

lifecycle costing.
Execute design and detailed engineering on the basis of selected technology
and implementation methodology and
a detailed survey.
Select superior contractors, consultants and vendors on the basis of past
performance.
Schedule project by accommodating
seasonal calamities.
Plan contingencies and acquire insurance.
Ensure the availability of all statutory
clearances before doing design and
detailed engineering work.

Table 6 shows the estimated cost of the

above risk responses for each work package.
Sources for the cost data are the detailed
feasibility report and cost estimate for the
project along with looking at other recently
completed projects and quotations from
vendors and contractors.
The next step is to form a decision tree
for each work package considering the
probability and severity of failure and various possible responses.
The group arrived at the following
decision alternatives.

his study suggests a project management model with the application of risk management principles. A decision support system
(DSS) has been developed in an analytic
hierarchy process (AHP) and decision tree
analysis (DTA) framework. This helps the
management of projects and helps in making objective decisions. The DSS identifies
risk factors that are inherent in the project,
analyzes their effect on various activities,
and derives responses in line with project
objectives, the organizations policy, and
business opportunities.
Risk is by nature subjective. However,
AHP allows one to objectively analyze the
effect of risk on a project by determining
the probability of its occurrences. The
probability and severity of each risk factor
are determined through the active involvement of field experienced persons in an
interactive environment. The information
is collected in a very structured format in
line with AHP requirements and processed
using available computer programs.
Additionally, sensitivity utility of AHP provides an opportunity to the risk management group to observe the nature of model
outcomes in different alternative decision
situations. DTA helps in selecting from
among various decision alternatives. Risk
management using a combined AHP and
DTA approach provides the following benefits.

using an integrated risk management

approach. It combines identification
of risk factors, analyzes their effects,
allows responses through desired
actions and controls these responses in
an interactive way by involving all
project stakeholders. Using sensitivity
analysis at each step provides management with an ongoing bases for decisions.

do nothing;
carrying out detailed survey (or additional survey work);

using superior technology;

engaging an expert project team; and
taking all responses as indicated in the
tables included with this article.

Figures 6, 7, 8, and 9 show the decision trees for the work packages (pipeline
laying, pipe laying across river, station construction, and telecommunication and
cathodic protection) of the project under
study. The probability and severity (time
and cost) for each decision alternative are
derived from the risk analysis study of each
package and the expert opinions gained
through brainstorming.
The expected money values (EMV)
are then calculated for each alternative
decision for all the packages. Tables 7-10
show the calculations of decision tree
approach of risk management. Table 11
shows the decisions emerge from the decision tree approach of risk management.

Although most of the risk analysis

methodologies quantify risk by determining probability and severity of risk
factors, they do not identify responses
objectively. However, the combined
AHP and DTA approach not only
determines probability and severity of
risk factors, but also identifies risk
responses for each work package using
an expected monetary value concept.
This approach is especially required
for large-scale projects because there
are many outcome uncertainties.
It provides an objective basis to management for additional investment in
planning or for engaging superior consultants, contractors, and suppliers for
specific work packages or items.
It defines the roles of project stakeholders in responding to specific risk
factors and it provides a basis of control
to the owner or management.
It develops an algorithm to model a
computerized decision support system
Cost Engineering Vol. 44/No. 3 MARCH 2002

General benefits can be achieved from

the application of risk management in any
type of project, including the following
benefits.

The issue/problems are clarified and

allowed for from the start of the project.
Decisions are supported by thorough
analysis of available data.
The structure and definition of the
project are continually and objectively
monitored.
Contingency planning allows prompt,
controlled, and pre-evaluated responses to risk issues that materialize.
There are clearer definitions of the
specific risk associated with a project.
It builds-up of a statistical profile of the
historical risk and this allows better
modeling for future projects.
It encourages problem solving and
provides innovative solutions to the
risk problems within a project.
It provides a basis for project organizational structure and appropriate
responsibility matrix.

Specific benefits, achieved by applying

risk management techniques in managing
the study project, include the following.

Problems encountered while executing a project were identified during

the planning phase. This helped in
making suitable responses for effective
project management. Responses
included alternative design and engineering, engaging superior consultants, contractors and vendors.
Critical activities were identified and
appropriate responsibilities were prepared for managing these critical activities.
Use of a risk management methodology helped complete the project without any time or cost overruns.
25

It helped in forecasting the project

achievement quantitatively and
allowed management to make decisions objectively.
It provided a control basis for effective
implementation of the project.
Changes in scope were accommodated through proper study of the implications on the overall objectives of the
projects.
Risk is by nature subjective. AHP provides a flexible and easily understood
way to analyze each risk factor with
respect to project achievement.
The risk analysis model, even for a
large complex project, can easily be
computerized through an Expert
Choice software package or Microsoft
Excel package.
AHP calls for active involvement of the
project stakeholders in risk analysis and
provides a rational basis for determining
the probability of project failure.
Risk management using AHP integrates all project stakeholders. This not
only involves them in making group
decisions but also improves the team
spirit and motivation.
Although using a decision tree
approach (DTA) in deciding a specific
course of action is not a new method,
the logical structure of risk management philosophy is identified by the
alternative responses in mitigating risk
and incorporating management perceptions.

Risk management using a combined

AHP and DTA provides an effective means
for managing a complex project efficiently,
and for fighting against time, cost, and
quality non-achievement.
Though this article makes an effort to
quantify risk by modeling its probability
and severity in line with the perceptions of
experienced project executives, subjectivity
could not be reduced to zero because the
findings and recommendations vary with
the types of projects, risk perceptions of
management, the organizations objectives
and policies, and the business environment.

26

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About the Author

Dr. Prasanta K. Dey,
obtained a doctoral
degree in production
engineering
from
Jadavpur University in
Calcutta, a masters
degree in industrial
engineering and management from the Asian Institute of
Technology in Bangkok, Thailand, and a
bachelors degree in mechanical engineering from Jadavpur University in Calcutta.
He is a faculty member of the Department
of Management Studies, University of the
West Indies, Cave Hill Campus, P O Box
64, Bridgetown, Barbados. He previously
was with the Indianoil Institute of
Petroleum Management in Gurgaon. He
previously was in the project department of
the Indianoil Corporation, Ltd., pipelines
division. He has published several articles
in international refereed journals, and his
current research interests are project risk
management, business process reengineering, and the application of operation
research techniques in industry. He can be
reached
by
e-mail
at
deypk@hotmail.com.